Case of Rubber Ducks Take a Bath

Case of Rubber Ducks Take a Bath

Minmin Zhou

ACCT 5200

01/04/2015

Case of Rubber Ducks Take a Bath

1. Determine the facts and identify the ethical dilemma involved

a. Duck’ R Us (“Ducks) manufactures rubber duck for using in bathtubs.

b. I am the partner on the audit engagement for Rubber Ducks.

c. Rubber Ducks has been very profitable in the early stage of business, but the sales started to decline in recent years.

d. Rubber Ducks was involved in a lawsuit that claims their products produced in the first quarter of 2003 have defective squeakers.

e. The cofounders of Huey, Dewey, and Louie broke out because of the argument regarding their contribution to the current operations of the company. Huey and Louie expected Dewey to spend more time in company’s sales performance.

f. Dewey agreed to accept only $400,000 as compensation and return $100,000 to company for fiscal 2003

g. On February 29, 2004, I issued an audit report with unqualified opinion for Ducks’ financial statement that was include in Duck’s Form 10-K filed with the Securities and Exchange (SEC) on March 1, 2004.

h. On March 7, 2004, the lawsuit regarding the defective ducks was resolved as result of $1.8 million settlement fee paid by Ducks, who underestimated by $300,000 for the case.

i. Only $1.5 million was accrued in the balance sheet as of December 31, 2003. Duck expected to disclose the settlement in its form 10-Q for first quarter ended March 31, 2004. The form will be filed with SEC on April 30, 2004.

j. Ducks will sent out the annual reports to shareholders about April 18, 2004.

k. Ducks have resisted my insistence of revising its financial statements to reflect this issue as the reason I have already issued an unquailed opinion on its financials statements that must be adequate.

2. Determine the affected parties and identify their rights

a. The audit firm

* The audit firm has the right to appoint a CPA to perform an audit...